Failing to file your taxes for several years can feel overwhelming. Whether you missed deadlines due to life circumstances, a misunderstanding of tax obligations, inability to pay your tax liability or simply procrastination, you may be worried about the consequences of not filing. You should be, because the IRS takes a dim view of tax evasion for any reason. But there’s good news, too. You don’t have to flee the country or look over your shoulder for the rest of your life. It’s always possible to resolve the issue and get back on track.
Understanding the Consequences of Failing to File
Once you start thinking about getting back on track, make haste to do it. Right now. Contact your CPA to start the process, because if the IRS catches up with you beforehand, you may have a hard time. Well, you will have a hard time. People have even gone to jail for not paying taxes. But let’s not think about that right now.
Accumulated Penalties and Interest
When you don’t file, the IRS may charge a failure-to-file penalty. This penalty typically starts at 5% of the unpaid taxes for each month your return is late, with a maximum penalty of 25%. As if that wasn’t enough to ruin your day, interest accrues on unpaid taxes from the time they are due until the full amount is paid.
Loss of Refunds
If you're owed a refund but fail to file your return within three years, the IRS may not issue the refund. This means you could lose out on money that is rightfully yours. Filing late can still allow you to claim your refund, but only within that three-year window. This may sound like some kind of punishment your parents might have doled out for coming in late after a night out, but really, three years is kind of reasonable.
IRS Enforcement Actions
The IRS has various tools at its disposal to collect unpaid taxes. If you haven’t filed in several years, they could take enforcement actions such as placing a lien on your property, garnishing your wages, or even levying your bank accounts. In extreme cases, criminal charges can be filed, though this is rare and typically reserved for individuals who willfully evade taxes.
Step 1: Gather Your Documents
The first step in getting back on track is to gather all the necessary documents to file your tax returns for the missing years. This might take some time, because you’ll need records of your income, including W-2s, 1099s, and any other sources of income during those years. Additionally, make sure to collect documentation for any deductions, credits, or expenses you can claim, such as mortgage interest statements, receipts for charitable donations, and medical bills.
You may have to get creative with this process, thinking about where you can access all those records. But if you don’t have all the paperwork, the IRS may help you retrieve some of this information. You can request a transcript of your earnings from the IRS, which includes wage and income information that the IRS received from your employers and other income sources.
Step 2: File for Each Missing Year
The next step is to prepare and file your tax returns for each missing year. It’s a good idea to consult your CPA at this stage, as they can help ensure accuracy and identify any deductions or credits you may have overlooked.
If you're unable to pay the full amount owed right away, file the returns anyway. Filing your returns stops the failure-to-file penalties from growing.
Step 3: Communicate with the IRS
Reaching out shows the IRS that you are serious about resolving the issue and can help you avoid more severe enforcement actions. If you owe back taxes and can't afford to pay them all at once, there are several options available:
Payment Plans
The IRS offers installment agreements that allow you to pay your tax debt over time. You can apply for a short-term payment plan (up to 180 days) or a long-term payment plan (monthly payments). These plans come with interest and late payment penalties, but they can provide relief if you’re unable to pay your balance immediately.
Offer in Compromise
In some cases, the IRS may agree to settle your tax debt for less than the full amount owed through an Offer in Compromise (OIC). To qualify, you’ll need to prove that paying the full amount would cause financial hardship or that the total amount is more than you could reasonably pay. The OIC process is rigorous, so working with a tax professional will take a big load off your plate.
Currently Not Collectible Status
If your financial situation is dire, you may qualify for Currently Not Collectible (CNC) status. This means that the IRS will temporarily halt collection efforts due to your inability to pay. However, interest and penalties will continue to accrue during this time, and the IRS will review your financial situation periodically.
Step 4: Stay Informed and Seek Professional Help
Tax laws change frequently, and staying informed about updates can help you avoid future issues. For example, changes in tax credits or deductions may affect how much you owe or are entitled to claim. Regularly reviewing your tax situation, especially when significant life events occur (such as getting married, buying a home, or having children), can help ensure that your tax returns are accurate and up-to-date.
A tax professional can provide valuable advice and guidance, particularly if you’ve fallen behind on your taxes. They can help you navigate IRS procedures, maximize deductions, and represent you in case of an audit or other tax-related issues.
Falling behind on your taxes can be stressful, but it’s not a situation without a solution. By gathering your documents, filing for the missing years, communicating with the IRS, and taking steps to prevent future issues, you can get back on track. Whether you choose to handle the process yourself or seek professional assistance, the key is to take action sooner rather than later. With the right approach, you can resolve your tax issues and start sleeping at night again.
by Kate Supino